Galveston biodiesel plant gets $15 million lifeline

Bioselect Galveston Bay, mired in a lawsuit with former partner Chevron, will pay off creditors and resume plant improvements with a $15 million bridge loan from an unidentified investor.

The Galveston Island, Texas, producer will use more than $2 million to pay off 17 vendors that filed liens against the company in the fall of 2007, said Galveston Bay attorney A. Craig Eiland. The $6 million in liens has been settled for the reduced amount. The bulk of the settlement will go to J.M. Davidson, the Corpus-Christi contractor that performed much of the work on the startup biodiesel facility.

Galveston Bay began operations in May 2007 with a 20 MMgy plant, with immediate expansion plans for a 100 MMgy capacity. It refines soybeans and other agricultural crops into biodiesel for use in the marine, trucking, industrial and commercial markets. A planned expansion stalled when minority partner Chevron declined to participate in a financing scheme known as "pay to play" in August 2007. The lawsuit followed. It reads more like a domestic dispute than a contractual one. Galveston Bay charges Chevron with abandonment. It claims that Chevron led the biodiesel partners on with promises of future financing. In reliance of those promises, Galveston Bay did not seek other financial suitors and its attractiveness to venture capitalists waned. Chevron counters that it fulfilled its contractual duties and wasn't obliged to participate in subsequent rounds of financing until the expanded plant was completed.

"Pay to play" gained favor during the dot com craze, when struggling companies needed infusions of funds to stay viable. New rounds of financing gave start-ups new life and weary investors some relief and validation. Chevron claims in this case that participation in each round of financing was voluntary, and it exercised its option not to stay in the game. The down side of "pay to play" is that later investors generally buy in at a lower valuation than the entrepreneurs, diminishing the founders' share values. But it also enables struggling ventures to move on to later stages of development and not become stalled due to financing hurdles. That appears to be the case here. Galveston Bay announced plans to expand capacity to 40 MMgy by summer 2008.

Biodiesel Magazine Staff Writer Sarah Smith has written an in-depth story about the Galveston Bay v. Chevron lawsuit. The article will be published in the March 2008 issue of Biodiesel Magazine.